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  1. 1. Figure 1: Power Companies Price Performance 3 Months Base = 4,960.30, NSE20 Share Index on 20 May 2013 Source: NSE, USE & DBIB estimates Figure 2: Summary Valuations Source: Bloomberg, NSE, USE & DBIB estimates 3,500 4,000 4,500 5,000 5,500 6,000 6,500 20-May-13 27-May-13 3-Jun-13 10-Jun-13 17-Jun-13 24-Jun-13 1-Jul-13 8-Jul-13 15-Jul-13 22-Jul-13 29-Jul-13 5-Aug-13 12-Aug-13 19-Aug-13 26-Aug-13 NSE20 UGSINDX KPLC KenGen UMEME Stock Bloomberg Ticker Current Price (Aug 20) Current Mkt Cap Fair Price Upside (downside) Rating 2013E EV/EBITDA 2013EP/E KPLC KPLL KN Equity KES 14.40 KES 28,101.1m KES 12.90 -10% Sell 6.97x 9.72x KenGen KEGC KN Equity KES 16.90 KES 37,152.3m KES 16.80 -1% Hold 8.39x 16.70x UMEME UMEMUG Equity UGX 360 UGX 584,596.1m UGX 420 8% Buy KES 13.00 KES 21,110.4m KES 14.00 17% Buy 5.09x 8.99x Power Sector Report East Africa 23 August 2013 Julie Kariuki jkariuki@dyerandblair.com Eric Ngure engure@dyerandblair.com We initiate coverage of the three power sector companies operating in East Africa: Kenya: We project peak electricity demand to grow at an eight-year CAGR of 11.30% from 1,344MW in 2012 to 3,163MW in 2020E supported by strong economic performance. We also project Kenyas inflation to fall from 7.0% in 2012 to 5.0% in 2020E. Uganda: We expect steady economic performance to drive peak demand to 948MW by 2020E, representing CAGR of 8.75% over the eight-year period. Uganda is also expected to maintain inflation at 5.0% between 2013E and 2020E, following a decline from 5.9% in 2012. Significant power sector growth potential: The commercial exploitation of petroleum in power generation, capacity additions, system refurbishments and distribution network improvements, renewable electricity generation, increased private sector participation and enabling legislative and policy frameworks are potential enablers to the attainment of power sector targets for both countries. We rate Kenyan companies Kenya Power Lighting Company Limited (KPLC; TP KES12.90, downside 10%) SELL; and Kenya Electricity Generating Company Limited (KenGen; KES16.80, downside 1%) HOLD on account of prevailing tariff limitations to cost effective operations and capacity investments. We rate Umeme Limited, the Ugandan company (UMEME; TP UGX420, upside 17% and KES14.00, upside 8%) BUY on account of strong Concession safeguards that curb against negative regulatory actions and political interference. Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
  2. 2. 2 23 August 2013 Power Sector Report Dyer & Blair Investment Bank Contents Executive Summary .......................................................................................................................................................................3 Power Sector Overview.................................................................................................................................................................4 Kenya Power & Lighting Limited .................................................................................................................................................12 Kenya Generating Company Limited...........................................................................................................................................17 UMEME Limited...........................................................................................................................................................................21 Valuation and Performance.........................................................................................................................................................26 Appendix......................................................................................................................................................................................31
  3. 3. 3 23 August 2013 Power Sector Report Dyer & Blair Investment Bank Executive Summary Key investment highlights Power sector expected to track economic growth. We expect strong economic growth to drive power demand with commercial exploitation of petroleum in power production further expected to facilitate cost-effective power generation, keeping overall inflation at acceptable levels. Infrastructural developments to deepen electricity access. We expect the timely commissioning of additional capacity, system refurbishments and distribution network (DN) improvements to drive electricity connectivity, reduce the power demand-supply deficit and improve electricity affordability as both Kenyan and Ugandan governments decisively implement measures to develop their respective power sectors under the Vision 2030 and Vision 2040 development plans. Quality power supply. Alongside infrastructural improvements, the shift from weather-dependent hydro-electric power (hydro power) and expensive thermal generation to renewable energy sources is expected to increase power output, improve electricity supply, build up adequate reserve generation capacity, reduce load shedding and prevent electricity shortages and supply disruptions. Promotion of private sector participation. Efforts by both governments to enhance private sector development and financing of energy generation projects are expected to contribute to the achievement of the power sector targets enshrined in the two development plans. Ongoing reforms in energy sector legislative and policy frameworks are also expected to cultivate an enabling environment. In summary, there exists significant potential for power sector companies. Prospects of rising electricity sales on the back of strong economic performance, population growth and system loss reductions point to strong potential performance. This is however highly dependent on the actual price of electricity: maintaining commercially viable power prices that reflect business costs while preserving end user affordability will therefore remain a challenge.
  4. 4. 4 23 August 2013 Power Sector Report Dyer & Blair Investment Bank 0.0% 1.5% 3.0% 4.5% 6.0% 7.5% 9.0% 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Kenya Uganda 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Kenya Uganda Power Sector Overview Electricity is a key macroeconomic enabler The International Monetary Funds, World Economic Outlook Database for April 2013 (IMF WEO for April 2013) projects Kenyas gross domestic product (GDP) at 5.85 percent and 6.24 percent for 2013E and 2014E respectively. GDP growth is expected to peak to 6.64 percent in 2016E then slowdown in 2017E to 5.82 percent. The onset of commercial oil production is expected to boost economic growth beyond 2020E as Kenya rolls out the power implementation plan for delivering the Vision 2030 power sector targets. Power demand correlates strongly to economic growth and as such we project peak electricity demand to grow at an eight-year compound annual growth rate (CAGR) of 11.30 percent from 1,344MW in 2012 to 3,163MW in 2020E. Ugandas GDP is set to recover from the dip experienced in 2012 and grow by 4.84 percent in 2013E. Economic growth is expected to accelerate to 7.0 percent in 2015E supported by the exploitation of petroleum deposits and hold steady at this rate until 2020E. We expect this to drive peak demand to 948MW by 2020E, representing CAGR of 8.75 percent over the eight-year period. Figure 3: Real GDP Growth, % Figure 4: Inflation1 (end of period consumer prices), % Source: IMF WEO April 2013 (up to 2018E) & DBIB estimates (2019E-2020E) Source: IMF WEO April 2013 (up to 2018E) & DBIB estimates (2019E-2020E) Energy has strongly bearing on consumer prices Kenya and Uganda maintain similar inflation baskets with food and fuel constituting a significant proportion of total weight. Both countries experienced high inflation in 2011 on account of increased food and power costs occasioned by poor weather and high international crude oil prices. Kenyas overall inflation during 2012 is estimated at 7.0 percent, which rate is projected to fall to 5.0 percent in 2020E. Uganda is also expected to maintain inflation at 5.0 percent between 2013E and 2020E, dropping from 5.9 percent in 2012. Although drought is erratic and unpreventable, energy costs could be contained by increasing renewable power generation. Both countries plan to shift away from expensive thermal power to geothermal production alongside other renewable modes of generation. The discovery of oil is also expected to reduce reliance on expensive fuel imports, containing inflation and driving down food prices further. Electricity access in Kenya and Uganda below par The International Energy Agencys World Energy Outlook 2011 (IEA WEO 2011) estimates Kenyas and Ugandas 2009 electrification rates at 16.1 percent and 9.0 percent respectively against the Sub-Saharan Africa (SSA) average of 30.5 percent. Kenya is however ranked 11th in Africa in terms of GDP by the IMF WEO for April 2013, making it economically larger than Ghana, Zimbabwe and Zambia despite these nations having electrification r